Against Carbon Shock Therapy

Two months into the US-Israeli war on Iran, fifty-nine countries attended the first high-level conference on transitioning away from fossil fuels. The attendees who gathered in Santa Marta, Colombia, agreed that decarbonization amounted to more than energy sovereignty. It meant “building a new economy . . . that empowers communities,” to cite Stientje van Veldhoven, the Dutch Minister for Economy and Climate, co-organizer of the event. The German State Secretary for the Environment, Jochen Flasbarth, reassured the room that countries would emerge “more resilient” from the green transformation.

This transformation, we argued in 2025, is a question of macrofinancial regimes: the combinations of monetary, fiscal, and financial institutions that shape decarbonization choices.1 Gabor, D., Braun, B. (2025). Green macrofinancial regimes. Review of International Political Economy, 32(3), 542–568. (<)a href='https://doi.org/10.1080/09692290.2025.2453504'(>)https://doi.org/10.1080/09692290.2025.2453504.(<)/a(>)(<)br(>) Countries can plan decarbonization through a big green state, derisk private green investments a la Biden’s US Inflation Reduction Act which showered private greentech manufacturers and energy producers with tax credits, or allow the market to drive transformation in response to higher carbon prices, in what we termed carbon shock therapy. This latter echoes the 1990s shock therapy imposed on post-Soviet economies, whereby state-owned companies were subjected to market discipline through price liberalization and the removal of cheap credit, subsidies, and tax concessions. Without state support, market competition and the price mechanism would sort out good from “bad,” inefficient firms, or, in a climate framework, green from “dirty” firms.

We warned that in a world of high and volatile fossil prices and Chinese cleantech exporters innovating at Shenzhen speed, carbon shock therapy could emerge as the default stance of states unwilling, or unable, to support local industries through the green transformation and to protect them against these carbon shocks along the way. Central banks may amplify cost pressures by raising interest rates to contain further rounds of inflationary pressures. Decarbonization would unfold in a disorderly manner, and would lead, like the original shock therapy, to rapid deindustrialization.

The US-Israeli attack on Iran, and the subsequent closure of the Strait of Hormuz, is threatening to unleash carbon shock therapy on the world. Yes, it is true that we have seen a shift to green technologies, with EV manufacturers like BYD reporting record sales, and demand for solar panels, heat pumps, and induction stoves on the rise. But this is precisely what “survival of the greenest” shock therapy looks like: a pick-up in green investments coupled with a disorderly destruction of economic activities reliant on fossil fuels and derivatives. Indeed, prices of crude oil, LNG gas, phosphate, helium, ammonia, sulfur, and urea, essential ingredients for economic activity, are rising. A looming scarcity of food, medicine, and other essential goods threatens to worsen already catastrophic levels of economic insecurity. East Asia is already experiencing an energy crisis, and rationing measures are spreading far and wide. Even where countries are resorting to patchwork emergency measures, like subsidies for fossil fuel consumption, the attending fiscal costs will eventually tip them into carbon shock therapy.2By mid 2026, fuel tax cuts were the most common government response to the energy crisis https://www.carbonbrief.org/iran-war-analysis-how-60-nations-have-responded-to-the-global-energy-crisis/

The consequences would be devastating, as the German state secretary knows too well, since Germany did follow that route in the wake of the Russian invasion of Ukraine fossil price increases.

The prospect of carbon shock therapy has made it more urgent than ever for states to scale up their planning capacity and establish a high-capital discipline, transformative public investment alternative: the big green state. This, we argue, is the pathway for the Santa Marta countries to achieve the decarbonized sovereignty imperative—the strategic pursuit of decarbonization as a matter of national security.

Recent histories of Carbon Shock Therapy

When the Russian invasion of Ukraine in 2022 menaced Germany’s industrial sector with a massive increase in energy costs, the country’s fiscal hawks capped gas prices for households and non-industrial businesses without shielding energy-intensive industrial firms. Price signals, the argument went, would discipline those firms into either shifting resources towards low-carbon technologies, thereby reducing dependence on Russian carbon fuels—or, alternatively, into shrinking operations.

The market delivered shrinking: in late 2024, energy-intensive industrial output was still 20 percent below pre-Ukraine levels, mirrored in a broader contraction of industrial production. Carbon shock therapists in the government and the central bank interpreted this shrinking manufacturing capacity as a necessary market-driven adjustment process. Yet a few months later, the slowdown prompted the newly elected government to announce a €1 trillion defense and infrastructure spending package in early 2025—a delayed, and it now appears rather ineffective effort to reverse self-induced deindustrialization by leveraged buyout.

For factories didn’t simply close down; instead, industrial conglomerates splintered, selling off operations to the highest bidder. In late 2025, chemical giant BASF sold its coatings division to Carlyle for €7.7 billion.3See (<)a href='https://www.ft.com/content/b2861b49-f10d-4f12-b8c6-d866bb4eb84e'(>)https://www.ft.com/content/b2861b49-f10d-4f12-b8c6-d866bb4eb84e.(<)/a(>) In February this year, Volkswagen received bids from Blackstone, EQT, and CVC for its Everllence unit, which produces shipping engines and heat pumps.4See (<)a href='https://www.ft.com/content/ef4337b5-4bf7-495a-941f-5001ae60e5e0'(>)https://www.ft.com/content/ef4337b5-4bf7-495a-941f-5001ae60e5e0(<)/a(>) The selloff is actively encouraged by the German government via its “Germany Fund,” a newly established derisking vehicle providing public guarantees to “mobilize private capital for investment to increase the competitiveness and future-readiness of the German economy.”5See (<)a href='https://www.bundesfinanzministerium.de/Content/DE/Pressemitteilungen/Finanzpolitik/2025/12/2025-12-18-deutschlandfonds-startet.html'(>)https://www.bundesfinanzministerium.de/Content/DE/Pressemitteilungen/Finanzpolitik/2(<)/a(>)025/12/2025(<)a href='https://www.bundesfinanzministerium.de/Content/DE/Pressemitteilungen/Finanzpolitik/2025/12/2025-12-18-deutschlandfonds-startet.html'(>)12-18-deutschlandfonds-startet.html.(<)/a(>) Meanwhile, in Brussels, the European Commission is exploring “ways to make it easier for investors in private companies to sell on their stakes.”6See (<)a href='https://finance.ec.europa.eu/regulation-and-supervision/consultations-0/targeted-consultation-private-equity-exits-2026_en'(>)https://finance.ec.europa.eu/regulation-and-supervision/consultations-0/targetedconsultation-private-equity-exits-2026(<)/a(>)

These experiences offer a forceful warning about the dangers of pursuing the carbon shock therapy path. The alternative to the German model is a political horizon in which governments green their energy systems and industries, build green public mobility, and restore food security. In what follows, we outline a toolkit for decarbonized sovereignty that combines stabilization measures with transformative ones.

A new politics of stabilization

Since the 2008 global financial crisis, the dominant paradigm of stabilization combines inflation targeting with derisking to secure financial stability. Central banks purchase government or corporate bonds to improve liquidity and “investibility,” their attractiveness to investors with specific expectations about risk-adjusted returns. In this framework, stabilization aims to restore price signals and allow markets to allocate resources efficiently. It puts capital in the driving seat.

Derisking, as a weak strategy of stabilizing on behalf of capital, often triggers political backlash since it uses public power to secure disproportionate distributional gains for investors. It is also ridden with coordination failures, since it assumes that the state can stabilize markets by modulating price signals without controlling them. Despite such systemic fragilities, the derisking regime remains politically appealing because it promises effective crisis management without institutional change and large public spending. Derisking is the path of least institutional resistance, the mark of a state that has hollowed out its capacity for direct intervention. This is why, in a situation of large price shocks—the kind triggered by petro wars, climate disasters, or supply chain shocks—derisking can easily tip into carbon shock therapy, as we have seen in Germany.

In the age of US petro warfare and Israel’s “one battle after another” foreign policy,7(<)a href='https://www.ft.com/content/6d0e66bf-4982-430a-821b-d27dfa1b0a3e?syn-25a6b1a6=1'(>)https://www.ft.com/content/6d0e66bf-4982-430a-821b-d27dfa1b0a3e?syn-25a6b1a6=1(<)/a(>) this scenario has become increasingly likely. As the Hormuz closure pushes oil and gas prices up, central banks around the world are signaling that they will raise interest rates if inflationary pressures mount. Governments meanwhile resort to a patchwork of emergency measures to manage the ripple effects of the energy crisis. For the fifty-eight countries in the Global South close to or already in debt distress, protecting citizens and businesses from rising carbon prices through fiscally expensive subsidies will delay or derail the transition to decarbonized sovereignty. This is a recipe for chaotic demand destruction, threatening a long and disorderly adjustment of economies across the world despite the Santa Marta commitments—with only a few energy-secure exceptions.

To avoid carbon shock therapy, we need a new politics of stabilization that can meet the challenges posed by bouts of inflation, recurrent shortages, and a lack of transformative state capacity. Isabella Weber and her collaborators have theorized recent episodes of corporations with market power taking advantage of price shocks to boost or protect profit margins as sellers’ inflation. We are currently in the early stages of another round. Every day since the start of the US-Israeli petrowar, oil companies in the EU have made €81.4 million in extra profits from skyrocketing fuel prices, around €2.5 billion in additional profits for March alone. To counter sellers’ inflation, consumer-focused relief measures—such as the electricity VAT cut and fuel price reductions proposed by the Spanish government—are not enough. Weber and Gregor Semeniuk have argued that governments will need to introduce price controls that should range from “wholesale price caps in commodity markets…to margins caps along the supply chain.” Without such interventions, measures to subsidize fossil consumption will effectively validate higher profits for oil and gas companies while increasing public debt (and trade deficits), restricting the room for transformative public spending. To counter the upward distributional effects of sellers’ inflation, governments should also introduce windfall taxes on energy companies—a demand that the governments of Austria, Germany, Italy, Portugal and Spain have put to the EU.8See: https://www.politico.eu/article/austria-germany-italy-portugal-spain-tax-energy-companies-benefit-iran-war/

Governments must meanwhile prepare for recurrent shortages in essential goods and commodities. Rationing is already on the horizon across Europe and Asia.9See: see https://www.ft.com/content/7d3a6810-b571-4730-aa35-f7bfcacdc242?syn-25a6b1a6=1 But without state-led planning, it threatens to exacerbate existing inequalities. It is therefore necessary to build institutional capacity, such as a Provisioning Essentials Authority (PEA) that can plan rationing in a just and systematic way, as part of a broader transformative strategy. Here, Britain’s experience of WWII offers a useful lesson: rationing was introduced either to address shortages of a “commodity deemed essential to civilians, or it was decided that a deliberate shortage should be created in an effort to release man-power, raw materials, and equipment for use in other industries.”10Phillips, Charles F. “Some Observations on Rationing.” (<)em(>)The Journal of Business of the University of Chicago(<)/em(>) 18, no. 1 (1945): 9–20. http://www.jstor.org/stable/2349729. Stabilization and transformation went hand in hand.

Indeed, any strategy of stabilization without transformation will quickly run out of steam. Price controls and rationing can easily lose legitimacy where capital systematically organizes to weaken their effects. Even in cases where competent technocrats succeed in buying a few months of reprieve, they cannot solve the question of underlying structural imbalances and state-market relationships that have given us derisking as the status-quo macrofinancial regime.11See redcaju.org for investible energy projects across the African continent. Stabilization alone cannot diminish the power of capital, even where it temporarily suspends its socially destructive profit imperative. Nor should we return to a world where private firms set the pace of renewable investment, coaxed with subsidies from the state—as ECB Executive Board member Frank Elderson called for in his post-Hormuz plea to orchestrate Europe’s energy sovereignty around investible renewables.12See https://www.ft.com/content/6fa21bdb-1387-4fb8-afc9-3d0b53affa58. To achieve a new, decarbonized sovereignty, we need to build a big green state that can plan real transformation.

Transformations

In theorizing green macrofinancial regimes, we can distinguish three factions of state managers who struggle over the distinct processes of planning, derisking, or shocking. Fiscal hawks subordinate decarbonization to the goal of maintaining a low-tax, low redistribution regime. Green planners seek to accelerate decarbonization by establishing non-market modes of coordination for green investment, usually through a mix of state-led planning and socialization of key sectors. And geopolitical hawks act as key arbiters, tipping status-quo derisking into either green planning or “let it rip” carbon shock therapy.

In China, as we have argued, a unique blend of energy security concerns and green planning laid the foundations for a big green state. As early as 2003, the US invasion of Iraq reshaped China’s conception of the geopolitics of oil and caused it to push for oil import diversification away from the Middle East. Yet CCP leaders soon came to understand that regardless of origin, oil was seaborne, and therefore susceptible to blockades enforced by the US navy. As a consequence, from the early 2010s, electrification and cleantech global leadership became a national security project, pursued through the Made in China 2025 industrial policy.

The petrowar against Iran has turned China’s geopolitical calculus into a powerful lesson for the rest of the world: you cannot import-diversify your way out of fossil fuel dependency. Europe’s shift to LNG imports from the United States, and insistence on decarbonization through derisking, looks particularly shortsighted today. The only secure way to manage an economy is to decarbonize it; the only form of sovereignty available at this moment in history is decarbonized sovereignty.

How would a big green state, forged in an alliance between green planners and geopolitical hawks, pursue decarbonized sovereignty? There are three institutional pillars: state-led electrification for energy sovereignty, a coercive credit and industrial policy nexus, and a green social bargain.

State-led electrification

A national energy strategy should intensify state-led efforts to expand electrification as a means to reduce reliance on fossil fuel imports, alongside improved energy efficiency and attainable climate goals. In most cases, this will rely in part on Chinese cleantech imports, but where combined with a well-designed industrial policy strategy and transformative PEA rationing, it can also scale up domestic productive capacity.

The big green state will furthermore have to weaken the influence of financialized private interests over key components of the energy system. Looking again to the UK, the development of Britain’s energy system—the construction of the electricity grid, nuclear and hydroelectric power stations, and of a nationwide gas transportation network, all at breakneck speed—occurred under public ownership. The subsequent privatization of the electricity and gas industries created a system that functioned for a time under business-as-usual conditions but that is fundamentally unfit to undertake necessary large-scale electrification.13Arthur Downing, a Director at UK’s largest energy supplier Octopus Energy, details this history in his forthcoming Power and the People. Schemes to transform this system invariably run into the profit problem faced by private renewables,14Christophers, Brett, 1971-. 2024. (<)em(>)The Price Is Wrong: Why Capitalism Won’t Save the Planet.(<)/em(>) Verso. while also failing to build the grid infrastructure that can absorb new renewable capacity. In Europe, “at least 120 GW of planned renewable energy projects…are at risk of delays or cancellation due to grid constraints, with many projects stuck in connection queues.”15See: https://www.review-energy.com/otras-fuentes/how-much-do-grid-constraints-threaten-europes-energy-security-and-industrial-growth Rather than pour fiscal resources into bringing their hurdle rates in line with the level required to “mobilize” private capital, governments should instead renationalize grid operators and utilities, and plan electrification.

The pre Iran war “solar revolution” in Pakistan, where solar went from 4 to 25 percent of generation over just four years, offers a warning against market-led, government subsidized electrification. The country’s early derisking regime, which guaranteed dollar-payments to independent power producers, produced record-high prices. In response, millions of households and businesses turned to imported Chinese solar panels, with support from the Pakistani state that purchased their excess solar power at inflated rates. But as this strategy is propagating rapidly across the world, the broader implications should be considered carefully: such solar revolutions threaten a utility death spiral: when wealthy consumers go off grid, utilities have to recover fixed grid costs from a smaller pool of poorer customers by hiking prices, which in turn pushes more customers off the grid—a spiral of unequal access and escalating vulnerability that weakens the state’s ability to plan the larger transformation of the economy required for decarbonized sovereignty.

Coercing credit

Transformative climate aspirations are not new. The 2015 Paris Climate Agreement, signed by 195 United Nation members, recognized that the climate crisis could not be fixed with carbon prices alone, but needed profound economic and financial transformation. This new climate politics stated plainly that without fixing finance, you can’t fix climate. It took aim at the dirty credit that sustained climate-destructive capital. But what began as a commitment to systemic change that would restructure energy systems, break fossil capital, penalize brown finance and build green economies, was neutralized and repurposed into a narrative of mobilizing private investment, in renewables, green mobility, or green industrial capacity.

Yet the experience of successful developmental states—from the East Asian tigers to contemporary China—teaches us that transformative industrial policy delivers where it is accompanied by coercive credit policy, where the state steers transformative investment through credit and equity flows. Together with Emil Huth, we theorize coercion as a two-pronged set-up: control over and through finance. Control over finance captures the state’s ability to direct credit allocation at the sectoral level, through state ownership of credit creating institutions (banks) or credit/equity allocating institutions (industrial funds). Control through finance coerces industrial capital into decarbonization priorities by rationing alternative sources of funding, while using credit relationships or equity ownership for close monitoring and enforcement of decarbonization targets. This coercive steering of credit flows replaces central bank independence with new forms of institutional coordination between central banks and green planning authorities.

China offers the most sophisticated contemporary example of coercive steering, combining control over credit through state ownership of banks and government guidance funds with control through credit that has steered local capital into Made in China 2025 and newer decarbonization strategies. But China is not alone. The European Central Bank has built coercive credit capacity through the framework for tilting its corporate bond portfolio towards greener issuers. More recently, the EU’s Savings and Investment Union and the UK’s Pension Bill both envisage new mandatory powers to steer institutional capital. There is resistance from private interests, but in moments of crisis governments can use their power to scale up coercive credit capacity.

Indeed, financial repression is coming back. Confronted with the relentless shocks emanating from the increasingly unstable core of the US-dominated global financial system, countries cannot transition out of fossil fuels under full capital mobility and central bank independence.  In the wake of the 2008 crash, capital controls once again came to be seen as a legitimate tool of macroeconomic management. But countries locked in the global US dollar system hesitated to deploy them for fear of foreign exchange shortages and external debt distress worsening.

But this external constraint is contingent. It can be tackled by a combination of strategic rationing orchestrated by a Provisioning Essentials Authority and a rapid increase in domestic productive capacity, industrial and agricultural. Senegal is an illustrative case. Like many other poor countries in or close to debt distress, it is highly dependent on food imports, covering 70 percent of its food needs with imports from Europe, Asia, and Brazil. The way out is not investible agriculture, as advocated by the World Bank. Rather, as Marieme Toure suggests, what’s needed is a three pillar developmental framework for green agriculture: redirecting fiscal resources from blanket input subsidies and credit guarantees toward strategic public goods (climate-resilient storage infrastructure, public seed breeding and multiplication program, soil health mapping and rehabilitation); green credit policies; and public procurement to create guaranteed demand for climate-resilient produce. Like food sovereignty, there are other pieces of low-hanging fruit that could ease the external constraint for Global South countries.

Green social bargain

But achieving wide-reaching and transformative programs requires political legitimacy. 

That green backlash is now ubiquitous in Western politics should not surprise us. The distributionally regressive consequences of its green carrots-for-capital toolkit are inconsistent with the notion of a “just transition”—there are too few winners to forge stable political coalitions. Similarly, an approach that limits itself to compensating “losers” on a policy-by-policy basis will fail to change the preferences and incentives of the people it affects.

But building and maintaining green support coalitions is eminently possible. A government capable of non-market coordination can build broad support by offering citizens bold visions of a decarbonized future. Take the example of green public mobility. Restricting individual mobility may be unpopular among car owners, but radically expanded green public mobility, free at the point of use, is popular. Beyond local public transit policy, strategic rationing could align green public mobility with broader decarbonization plans. A government that is serious about such a vision may, for instance, need to ration the production of individual passenger cars to redirect industrial resources towards the production of electric buses and charging infrastructures.

There is no doubt that countries can afford free green public mobility. Crushed by fossil fuel shortages far worse than anything Europe has had to deal with so far, the government of Pakistan has announced free public transit by bus, as has Ho Chi Minh City in Vietnam. Indeed, the most well-known example of this is Germany’s post-Ukraine Deutschlandticket, a vastly popular 9-euro monthly flat-rate fare, valid across the country. Since then, the government has increased the price of the Deutschlandticket sevenfold, making it unaffordable to most public transit users—in Germany, it seems, carbon shock therapy will continue until morale improves.

Carbon shock therapy is a policy choice. It means a disorderly adjustment to a world of higher fossil prices, and growing shortages: a patchwork of emergency measures that may buffer citizens from the impending demand destruction, with distributive impacts that leave in place the status-quo, and cements the political appeal of green derisking for accelerating the shift to renewables. The alternative is a decarbonized sovereignty that could harness the crisis unleashed by Trump’s petro wars to build a big green state regime, combining emergency stabilization measures—from price controls to strategic rationing—with long-term transformative interventions. The latter would accelerate state-led electrification, build coercive credit capacity to support green industrial policy and food securit

y, and forge a new green social bargain.